One State’s Rules Sparked Fundraising Lawsuit In Another

August 21, 2012 Mark Hrywna

A defendant named in a lawsuit against a veterans’ charity believes the complaint against his firm is a misunderstanding by the California Attorney General and a “misreading of a single statement in state-mandated disclosures.”

Geoffrey Peters, president of Creative Direct Response Fundraising Group (CDR), said the complaint’s problem with his firm boils down to the language Help Hospitalized Veterans (HHV) used in state disclosures that “this mailing was produced by Help Hospitalized Veterans, which retains 100 percent of the contributions made.” The disclosure is mandated by a Florida statute, he said, and was made on advice of counsel, and is the language of HHV and not CDR.

“CDR is alleged to have misled the public in California because of our client’s zealous compliance with a statute in Florida of dubious constitutionality,” Peters said, adding that he’s confident that once the state reviews the record, CDR will be dismissed as a defendant. “We have literally dozens of examples of identical disclosure language from dozens of other charities, obviously attempting to comply with Florida law as well. We hope that the California attorney general will quickly realize her error and dismiss the lawsuit,” said Peters.

In a statement posted on its website titled “Help Hospitalized Veterans Reaffirms Commitment to Veterans,” HHV said it “shares and supports” the AG’s focus on making veterans a priority. The statement reads, in part: “While disappointed in the recent accusations leveled against the company, HHV looks forward to respond with facts and information that should change the current perception of HHV for those who are willing to listen. In the end, you don’t last for 40-plus years as a nonprofit unless you’re doing something right in helping the deserving veterans of this nation.”

Attorney General Kamala Harris filed a civil lawsuit in State Superior Court in Riverside County on Aug. 9 seeking removal of officers and directors of Winchester, Calif.-based Help Hospitalized Veterans (HHV), which distributes arts and craft kits to hospitalized veterans, as well as general and punitive damages, restitution and civil penalties.

The lawsuit alleges that directors and officers of HHV breached their fiduciary duty by wasting charitable assets on golf memberships and a condominium for use by officers, and authorizing excessive executive compensation to the group’s former president, Roger Chapin, and current President Michael Lynch.

The suit alleges that the HHV board approved compensations packages for Chapin and Lynch that were “unreasonable and excessive” and in violation of the law, including unlawfully approving retroactive salary increases. Chapin received more than $2 million in excessive compensation, including a lump-sum retirement payment of nearly $2 million in a Supplemental Executive Retirement Plan (SERP), and Lynch received more than $900,000 in excessive compensation, the lawsuits states. A veteran of the U.S. Army Finance Corps, Chapin retired as president of HHV in August 2009.

Also named as defendants in the lawsuit were former employee Elizabeth Chapin, Roger Chapin’s wife; the charity’s officers or directors Robert Beckley, Jr., Thomas Arnold, Leonard Rogers, and Gorham Black; accountant Robert Frank and McLean, Va.-based Frank & Company, PC; and Bowie, Md.-based CDR.

The lawsuit alleges that the nonprofit used “accounting gimmicks” to “inflate the amount of income purportedly spent on providing veterans’ services while artificially minimizing the amount reportedly spent on fundraising.” For example, in one case it led to a drop in reported fundraising costs from 65 percent of total costs to less than 30 percent, resulting in “substantially false” filings to both the Internal Revenue Service (IRS) and the Attorney General’s office.

Chapin also is charged with self-dealing, including loans HHV allegedly made to a vendor, American Target Advertising (ATA). ATA President of Corporate and Legal Affairs Mark Fitzgibbons, a frequent critic of state charity regulators, said he hasn’t yet seen the complaint but the company has a longstanding policy that it does not talk about its clients. ATA was not named as defendant in the complaint.

Among the other charges in the complaint are aiding and abetting a breach of fiduciary duty against Frank and his accounting firm; wrongful acquisition of property/unjust enrichment against Chapin and his wife Elizabeth, for reimbursements. CDR was accused of misrepresentations in solicitations to donors, along with HHV, its directors and officers.

“A number of states, wishing to regulate telemarketers who are ‘solicitors’ rather than ‘professional fundraising counsel’ have passed statutes or promulgated regulations that did not differentiate between these two categories of ‘fundraisers.’ These statutes, of questionable constitutionality, required ‘fundraisers’ to indicate what percentage of funds they retain versus what percentage of funds were turned over to the charity,” Peters said in an email.

“Clearly, in the case of professional fundraising counsel, like CDR, since 100 percent of the funds were collected by a caging company and deposited in the bank account of the charity – the answer was “100% percent of all.’ Since the client charity determines how to spend their own money, CDR like most professional fundraising counsel, has no knowledge of what percentages they spend on fundraising, programs, administration or the like until the charity publishes their IRS Form 990,” he said.

Among the other allegations in the complaint:

A Maryland company called EZScores donated sports scorecards in 2005 to the Coalition to Salute America’s Heroes (CSAH), another charity founded by Chapin, which would distribute these calling cards to active duty military personnel, allowing them to obtain sports scores and information by telephone. Both HHV and CSAH claimed almost $19 million in donations as revenue and program services expenses, according to the attorney general.

HHV purchased a condo in 2006 “without adequate inquire into the prudence of that investment,” which incurred a loss of more than $150,000. There also was the $80,000 spent for golf club memberships as a perk for board members and inadequate monitoring of reimbursements for employee travel, entertainment and gifts.

Lynch approved wasteful and expensive reimbursements to Elizabeth Chapin for gifts to people at ATA. From 2003 through 2006, HHV allegedly provided at least four loans to ATA totaling some $800,000 that was not paid back in full, according to the complaint.